Important disclosures and certifications are contained from page 3 of this report. www.danskeresearch.com

Investment Research — General Market Conditions

News this week

With less than two weeks to referendum day, it is no longer possible to register as a voter (the

deadline was extended to midnight on Thursday as the website crashed on Tuesday) and both

camps have intensified their campaigns. Recently, TV channels have aired several EU

programmes including debates among leading politicians, which could potentially affect the

referendum outcome as recent opinion polls have shown there are still many undecided voters.

We plan to monitor the coming opinion polls closely for any new trends. Until last week,

most opinion polls had ‘remain’ ahead (although not by much or necessarily statistical

significantly) but as we wrote in Brexit Monitor #6: It is not over until the fat lady sings, 3

June, it is not over yet. At this stage, we cannot say what the outcome will be. Betfair’s

implied probability of a Brexit is currently 27.4%.

GBP risk premiums in the FX option market increased further this week while EUR/GBP

was little changed following the past week’s repricing of Brexit risks. As such, opinion polls

are likely to continue to be pivotal for pricing of GBP assets in coming weeks. We expect

volatility to remain high and see risks skewed towards a weaker GBP ahead of the

referendum as Brexit uncertainties are likely to remain intact.

What to watch next week

We expect the Bank of England meeting to be a non-event as the central bank has repeatedly

indicated it is side-lined until after the referendum (see BoE Review: BoE repeats it is

sidelined until after the referendum, 12 May).

In terms of data releases, next week’s schedule is very busy. The most important release is

Wednesday’s April labour market report. The labour market cooled in Q1, in our view partly

reflecting delayed hiring due to Brexit uncertainties. The question is whether this slowdown has

continued in Q2, when growth based on data released so far seems to be better than in Q1.

See also Strategy: Our asymmetric market views ahead of the UK's EU vote, 10 June.

It is not over until the fat lady sings – still a close race Betfair implied probability of a Brexit is slightly below 30%

Source: Financial Times https://ig.ft.com/sites/brexit-polling/ Source: Betfair, Danske Bank Markets

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

Oct/2015 Dec/2015 Jan/2016 Mar/2016 May/2016

%%

Source: Financial Times - https://ig.ft.com/sites/brexit-polling/

Remain in the EU Leave the EU Undecided

31.7%

17.9%

27.4%

0%

5%

10%

15%

20%

25%

30%

35%

25

Ap

r

27

Ap

r

29

Ap

r

01

Ma

y

03

Ma

y

05

Ma

y

07

Ma

y

09

Ma

y

11

Ma

y

13

Ma

y

15

Ma

y

17

Ma

y

19

Ma

y

21

Ma

y

23

Ma

y

25

Ma

y

27

Ma

y

29

Ma

y

31

Ma

y

02

Ju

n

04

Ju

n

06

Ju

n

08

Ju

n

10

Ju

n

Betfair, implied

probability of a 'Brexit'

10 June 2016

Brexit Monitor #7

Less than two weeks to go

EUR/GBP little changed this week

Source: Bloomberg, Danske Bank Markets

1-month GBP/USD volatility spiked

higher this week

Source: Bloomberg, Danske Bank Markets

Senior Analyst Mikael Olai Milhøj +45 45 12 76 07 milh@danskebank.dk

Senior Analyst Morten Helt +45 45 12 85 18 mohel@danskebank.dk

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FX option market

GBP volatility relative to other majors 1Y 25 delta risk reversals

Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Macrobond Financial, Danske Bank Markets

Rates and sovereign debt rating

UK 10Y government bond yields vs US and German Bank of England pricing little changed from last week –

roughly one-third probability of BoE rate cut in 2016 is priced

Source: Bloomberg Source: Danske Bank Markets

5Y CDS: UK vs Germany UK sovereign debt rating

Source: Bloomberg Source: Bloomberg

-4

-7 -8 -8 -9 -6 -6 -6 -2 -0 +1 +3 +5 +7 +9 +11

0.50%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

Jun16 Dec16 Jun17 Dec17 Jun18 Dec18

GBP/OIS forward market

Current Live Policy Rate

Foreign currency

Long Term RatingOutlook Since

Fitch AA+ STABLE 19/04/2013

Moody's Aaa STABLE 22/02/2013

Standard & Poor's AAAu NEG 12/06/2015

United Kingdom sovereign ratings

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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The

authors of the research report are Mikael Olai Milhøj, Analyst and Morten Thrane Helt, Senior Analyst.

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